Federal Reserve Credit jumped $15.2bn to a record $2.597 TN (21-wk gain of
$316bn). Fed Credit was up $190bn y-t-d and $307bn from a year ago, or 13.4%.
Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended
3/30) rose $5.9 to a record $3.408 TN. "Custody holdings" were up $388bn from
a year ago, or 12.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied
by Bloomberg - were up $1.543 TN y-o-y, or 19.7%, to a record $9.382 TN.

Total Money Fund assets increased $4bn last week to $2.736 TN. Money Fund
assets were down $74bn y-t-d, with a decline of $247bn over the past year,
or 8.3%.

Total Commercial Paper outstanding increased $1.7bn to $1.081 Trillion. CP
was up $112bn y-t-d, although it was down $28bn, or 2.5% from a year ago.

Global Credit Market Watch:

March 31- Bloomberg (Anabela Reis): "Portugal reported a budget deficit of
8.6% of gross domestic product last year, missing a government target of 7.3%
and causing a jump in borrowing costs that increases the risk of a bailout...
The agency also revised the 2009 budget gap to 10% from 9.3%..."

April 1 - Dow Jones (Kellie Geressy-Nilsen and Lynn Cowan): "Wall Street borrowing
ballooned during the first quarter and equity issuance ran at a high seasonal
level in a sign corporations are feeling more comfortable with the economic
recovery. Borrowers tapped the high-grade market in near record numbers during
the first quarter, with nearly $275 billion of U.S. marketed investment-grade
bonds sold during the period. And stock issuance during the quarter ran higher
than normal, with companies raising $77.1 billion, the largest first-quarter
amount since 2000, according to... Dealogic."

Muni Watch:

March 30 - Bloomberg (William Selway and Henry Goldman): "The real-estate
crash is catching up to U.S. municipalities. Cities, counties and school districts
had been sheltered from the full impact of the slump because of the lag between
when realty prices fluctuate and values are reset by local tax assessors. That's
changing as property rolls are adjusted to the current market and residents
push to have their taxes cut. Local officials are now facing the consequences.
Property- tax revenue dropped in the last three months of 2010 at the fastest
pace since home prices slipped from their peak more than four years ago..."

March 30 - New York Times (Michael Cooper and Lizette Alvarez): "Michigan,
whose unemployment rate has topped 10% longer than that of any other state,
is about to set another record: its new Republican governor, Rick Snyder, signed
a law Monday that will lead the state to pay fewer weeks of unemployment benefits
next year than any other state... All states currently pay 26 weeks of unemployment
benefits, before extended benefits paid by the federal government kick in.
Michigan's new law means that starting next year, when the federal benefits
are now set to end, the state will stop paying benefits to the jobless after
just 20 weeks."

March 28 - Bloomberg (Darrell Preston and Aaron Kuriloff): "Harris County-Houston
Sports Authority bonds that financed venues for the Houston Texans and two
other sports teams have fallen as much as 34% amid speculation the agency may
default on payments."

Global Bubble Watch:

March 29- Bloomberg (Noah Buhayar): "Global high-yield company bond sales
set a record in March as borrowers including CIT Group Inc. and satellite operator
Intelsat SA sold debt, according to Bank of America Corp. Sales surged to $41.2
billion this month through last week, beating the earlier full-month record
of $40.9 billion in March 2010..."

March 31- Bloomberg (Jason Webb and Lilian Karunungan): "Emerging-market borrowers
completed the busiest ever start to a year, selling $195 billion of bonds on
international markets to secure funding while interest rates in the U.S. and
Europe stay at all-time lows. Governments from Turkey to Hungary and companies
including Banco do Brasil SA boosted offerings above last year's record for
a first quarter by $23 billion... "

March 28 - Bloomberg (Lynn Thomasson and Whitney Kisling): "U.S. executives
are starting to spend the record $940 billion in cash they built up after the
credit crisis... Takeovers topped $256 billion this quarter, the most since
the collapse of Lehman Brothers... Standard & Poor's 500 Index companies
authorized 38% more buybacks in 2011 than a year earlier and dividends may
increase to a record $31.07 a share in 2013..."

March 31- Financial Times (Helen Thomas in New York and Anousha Sakoui): "US
companies have returned to large strategic deal-making, helping to boost global
mergers and acquisitions activity by 26% in the first quarter. Thanks to a
flurry of big deals, US M&A activity jumped 84% to $267bn in the first
three months of the year, compared to the same period in 2010. The US now accounts
for almost half of global activity, up from about a third last year."

March 30 - Bloomberg (Zachary R. Mider): "Corporate executives in the first
quarter paid the most for takeovers since before the collapse of Lehman Brothers
Holdings Inc., kicking off what investment bankers say may be the busiest year
for deals since 2007. Acquirers paid a median 9.2 times earnings before interest,
taxes, depreciation and amortization for companies in the period, the most
since the second quarter of 2008..."

April 1 - Dow Jones (Lynn Cowan): "Stock-related sales in the U.S. raised
more money in March than in any March since 2000, according to... Dealogic.
The U.S. recorded 103 deals that raised $41.6 billion in March, up 62% from
the year-earlier month when 109 deals raised $25.6 billion... Transactions
included initial public offerings, follow-ons and convertible stock issuance."

Currency Watch:

The U.S. dollar index declined 0.5% to 75.82 (down 4.1% y-t-d). On the upside
for the week, the Brazilian real increased 3.4%, the South African rand 2.3%,
the South Korean won 2.1%, the Norwegian krone 2.1%, the New Zealand dollar
1.8%, the Canadian dollar 1.8%, the Swedish krona 1.3%, the Mexican peso 1.3%,
the Australian dollar 1.2%, the Danish krone 1.1%, the Euro 1.1%, the Taiwanese
dollar 0.7%, the British pound 0.4% and the Singapore dollar 0.1%. On the downside,
the Japanese yen declined 3.2% and the Swiss franc 0.4%.

Commodities and Food Watch:

March 30 - Bloomberg (Elizabeth Campbell and Tony C. Dreibus): "Cattle futures
surged to a record on bets that meat demand in Japan will increase amid concerns
that farmland and animals were tainted after the March 11 earthquake and tsunami
damaged nuclear units. Retail-beef prices in the U.S. last month climbed to
an all-time high. The nation's cattle herd dwindled to the lowest since 1958,
and meat exports have surged, spurred by a demand in emerging markets. Shrinking
domestic supplies are increasing costs for supermarkets and restaurants."

April 1 - Bloomberg (Patrick McKiernan): "Hog futures for June delivery rose
as much as 0.5% to $1.0435 a pound, the highest for a most-active contract
since at least 1986."

March 30 - Bloomberg (Maria Kolesnikova and Kateryna Choursina): "Ukraine,
once the world's largest barley exporter, extended curbs on grain shipments,
potentially driving prices higher and denying supply to consumers including
the 1 million camels owned by Saudi Arabia's Bedouin... Feed-barley futures
traded on the Australian Stock Exchange jumped 51 percent in the past year
as Russia also restricted exports and crops from Canada to Kazakhstan were
ruined by flooding and drought."

March 31- Financial Times (Leslie Hook and Gregory Meyer): "China plans to
rebuild a cotton reserve this year to help encourage domestic production as
farmers fret that prices could tumble from historic highs... Beijing said it
would buy cotton for a 'temporary' reserve from September 1 2011 to March 31
2012..."

March 31- Bloomberg: "The northern Chinese province of Ningxia will raise
minimum wages by an average of 24.9 percent from Apr. 1, according to... the
local government's website..."

March 31- Bloomberg (Frederik Balfour): "China's growing ranks of millionaires
are set to buoy sales at Sotheby's spring auction in Hong Kong as collectors
seek Qing Dynasty porcelain, Chateau Lafite wines and multi-million-dollar
paintings. The event may bring in as much as HK$2.4 billion ($310 million),
said the... auction house. The eight-day marathon... features two private European
collections of ceramics and contemporary art, including an 18th-century Chinese
vase worth more than $23 million."

March 31- Bloomberg: "The Chinese government will start controlling vehicle
ownership in cities of more than 10 million people from 2011 through 2015 to
help ease jams and air pollution, the Economic Observer reported... The government
is talking to two cities about taking measures to cap vehicle purchases, the
report said."

India Watch:

March 31- Bloomberg (Abhijit Roy Chowdhury): "India's population is provisionally
estimated at 1.21 billion, based on the 2011 Census..."

Latin America Watch:

March 31- Bloomberg (Matthew Bristow): "Brazil's budget deficit after interest
payments widened to a record 11.2 billion reais ($6.9 billion) from 1.53 billion
reais in January... The figure was higher than the median forecast of 8 billion
reais..."

Unbalanced Global Economy Watch:

March 28 - Bloomberg (Katya Kazakina): "Wealthy Chinese buyers competing for
their cultural heritage pushed New York's week of Asian art to a record, topped
by a delicate pear-shaped Chinese vase, estimated to fetch just $800 to $1,200.
The lot soared to $18 million, the most expensive in a dozen Asian Week auctions
at Sotheby's and Christie's International. Together, the auction houses took
in a record $202 million, 56% above the previous high in 2007. Sotheby's described
the modestly-estimated vase, decorated with birds and peonies, as of 'probably
Republican period' (early 20th-century). Yet it had a Qianlong seal and anything
of that 1736-1795 era commands higher prices, said dealers."

March 31- Bloomberg (Johan Carlstrom and Kim McLaughlin): "Sweden's economy
will grow 4.2% this year as employment reaches the highest level in two decades,
underpinning consumer demand in the largest Nordic economy, the National Institute
for Economic Research said."

Crude Liquidity Watch:

March 29 - Financial Times (Sylvia Pfeifer, Javier Blas and David Blair): "Opec...
will reap $1,000bn in export revenues this year for the first time if crude
prices remain above $100 a barrel, according to the international Energy Agency.
The cartel has been one of the main beneficiaries of high oil prices, which
have soared in recent weeks amid the civil uprising in the Middle East and
north Africa."

April 1 - Wall Street Journal (Stephen Moore): "If you want to understand
better why so many states -- from New York to Wisconsin to California -- are
teetering on the brink of bankruptcy, consider this depressing statistic: Today
in America there are nearly twice as many people working for the government
(22.5 million) than in all of manufacturing (11.5 million). This is an almost
exact reversal of the situation in 1960, when there were 15 million workers
in manufacturing and 8.7 million collecting a paycheck from the government.
It gets worse. More Americans work for the government than work in construction,
farming, fishing, forestry, manufacturing, mining and utilities combined. We
have moved decisively from a nation of makers to a nation of takers."

Real Estate Watch:

March 30 - Bloomberg (John Gittelsohn): "About 1.8 million homes that are
delinquent or in foreclosure loom as additional supply for the struggling U.S.
housing market, according to CoreLogic Inc. The so-called shadow inventory
amounted to a nine-month supply of properties as of January, about the same
as a year earlier... Rising inventory threatens to further depress home values
as sales slump. There was an 8.6-month supply of homes for sale on the open
market in February..."

Central Banking Watch:

April 1 - Bloomberg (Steve Matthews and Maryam Nemazee): "Federal Reserve
Bank of Kansas City President Thomas Hoenig, the U.S. central bank's longest-serving
policy maker, said additional purchases of U.S. Treasury securities could lead
to higher asset prices and higher inflation. 'My view is QE2 was unnecessary,'
Hoenig said... My concern would be if there were any further easing into a
recovery is that you do accelerate imbalances that then cost you dearly later.'"

March 28 - Bloomberg (Scott Hamilton): "St. Louis Federal Reserve Bank President
James Bullard said policy makers should review whether to curtail a plan to
buy $600 billion in Treasury securities, noting that the U.S. recovery may
not need that much stimulus. 'The economy is looking pretty good,' Bullard
said... 'It is still reasonable to review QE2 in the coming meetings, especially
this April meeting, and see if we want to decide to finish the program or to
stop a little bit short,' he said, referring to the second round of so-called
quantitative easing."

March 30- Bloomberg (Vivien Lou Chen): "The Federal Reserve's 'highly accommodative'
monetary policy is partly to blame for rapidly increasing global commodity
prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues
to raise the benchmark interest rate toward 1% soon. 'Once again there are
signs that the world is building new economic imbalances and inflationary impulses,'
Hoenig, the central bank's longest-serving policy maker and the lone dissenter
at Fed meetings last year, said... 'The longer policy remains as it is, the
greater the likelihood these pressures will build and ultimately undermine
world growth.'"

California Watch:

March 30 - Bloomberg (Michael B. Marois and James Nash): "California Governor
Jerry Brown's campaign pledge to fix perennial budget jams with his ripened
political acumen failed to overcome the government dysfunctions that ensnared
his predecessor, Arnold Schwarzenegger. Brown... who was governor from 1975
to 1983, conceded yesterday he lacks Republican support for a June referendum
to keep higher sales, income and vehicle taxes from expiring. Extending them
five more years, he had said, was crucial to closing a $15 billion gap in his
$84.6 billion budget without slashing funds for schools and public safety."

New York Watch:

March 31- Bloomberg (Michael Quint): "New York legislators approved spending
bills closing a $10 billion deficit just after midnight, the first time since
2006 they passed a budget before the start of the fiscal year."

Q1 and QE2

Federal Reserve holdings inflated $190bn, or 7.9%, during the first quarter
to conclude Q1 at a record $2.597 TN. Such expansion is unprecedented in a
non-crisis environment, with recent growth in Fed Credit surpassed only by
2008's extraordinary third and fourth quarters. Keep in mind that the Fed's
balance sheet ended April 2008 at about $860bn. International central bank
reserve assets increased $358bn during the quarter (as tallied by Bloomberg)
to a record $9.382 TN. Global reserves were about $6.5 TN back in the spring
of '08. Too routinely, the dollar index declined 4.1% during the just completed
quarter.

And while Federal Reserve (and global central bank) liquidity operations have
fueled one heck of an inflationary boom throughout commodities and equities
markets, arguably more consequential effects reverberate throughout Bubbling
global fixed income marketplaces. Despite a lengthening list of market concerns,
first quarter total global securities issuance was down only 4% from an exceptionally
strong year ago issuance to $1.96 TN (Dealogic). At $279 billion, Q1 investment-grade
debt issuance was up 19% from a year ago to the third highest level on record.
Here at home, a booming quarter of corporate debt issuance ended on a strong
note. Corporate sales rose to about $33.4 billion this week, the third-largest
week on record, while pushing y-t-d U.S. issuance to a record $399.5 billion
(from Bloomberg).

Globally, high yield bond sales jumped 30% y-o-y to about $90bn. March saw
a record $41.2bn of junk bonds sold. For the quarter, total high yield finance
issuance jumped to $113.8bn, up 35% from a year earlier to surpass the record
level set the previous quarter. And from Dow Jones (Katy Burne): "Two years
ago, the average market premium on high-yield debt over comparable government
debt was 16.9 percentage points, compared to 4.76 percentage points now..." According
to Bloomberg, leveraged loans volumes jumped to $149bn, the strongest quarter
since Q4 2007.

As always, deal-making luxuriates in loose "money." Global Mergers & acquisition
volume jumped 16% from a year ago to $716.3bn (Dealogic). U.S. volumes surged
45% to $290.8bn. European deal volume rose 10% y-o-y to $192.3bn. M&A volume
in Asia jumped 29% from Q1 2010 to $146.2bn (Dealogic), the strongest first
quarter volume since 2008's $155bn. Emerging market M&A posted record Q1
volumes of $205.7bn (up 1% y-o-y). According to Bloomberg (Zachary Mider), "acquirers
paid a median 9.2 times earnings before interest, taxes, depreciation and amortization
for companies in the period, the most since the second quarter of 2008..." Analysts
see global deal volume jumping 15-20% this year, this following 2010's 27%
rise.

On the equities side, global initial public offerings (IPO) volume of $43.6bn
was down somewhat from the year ago $51.9bn (Dealogic). U.S. IPOs raised $12.5bn
during the first quarter compared to $3.7bn from Q1 2010.

Clearly, the first quarter was replete with monetary excess. The second quarter
monetary backdrop is less certain. On the one hand, the Fed still has three
long months of weekly Treasury purchases in the offing. On the other, the markets
should begin to contemplate a post-QE landscape. Divergent comments from various
members of the Fed are not offering much in the way of clarity for what is
shaping up to be unusually muddied monetary prospects.

Federal Reserve Bank of St. Louis President James Bullard - an early and leading
proponent for "QE2" - said this week that the Fed should consider wrapping
up its quantitative easing program $100bn short of its original $600bn objective.
Today, Federal Reserve Bank of Philadelphia President Charles Plosser and Federal
Reserve Bank of Richmond President Jeffrey Lacker both stated the possibility
of the Fed hiking rates later this year, a day after Federal Reserve Bank of
Minneapolis President Narayana Kocherlakota suggested the same. A chorus of "hawkish" Fed
comments - along with a decent jobs report - this morning had the dollar catching
a bid and the bond market living on the edge. That was, until a series of dovish
headlines from New York Fed President William Dudley's speech crossed the wires.

A "still tenuous" recovery is "far from the mark" - "We must not be overly
optimistic about the growth outlook" - "The coast in not completely clear" - "I
don't see any reason to pull back..." Mr. Dudley's dovishness was what the
market wanted. The dollar immediately weakened, bond prices strengthened and
the "risk-on" trade, well, it was further emboldened.

It's difficult to take issue with the markets' view that Team Bernanke/Dudley
(vice-chairman of the FOMC) will win the day - and that an increasingly divided
Fed will bicker, float mixed signals and, at the end of the day, stick with
ultra-loose for the foreseeable future. And as much as a few prominent policymakers
would like to contemplate - and begin planning for - an unwind of the Federal
Reserve's bloated balance sheet, Mr. Market listens politely while speculating "a
cold day in hell."

Yet, markets will most likely three months from today be operating without
additional Fed liquidity injections. As policymakers had hoped, QE2 provided
a powerful jolt. Continued massive issuance of Treasury debt has been accommodated;
equity prices have surged; confidence has been boosted; corporate debt issuance
has boomed; leveraged lending has been fully revived; an M&A boom has been
unleashed; the hedge fund industry has more than recovered; intensive "animal
spirits" have been enlivened throughout - and some private-sector jobs have
returned.

But has The Jolt incited ample momentum within the private-sector Credit system
and throughout the economy to now enable a successful "hand-off" from massive
public-sector stimulus to a self-sufficient private-sector Credit up-cycle?
Examining recent corporate debt issuance, stock prices, M&A, and global
risk asset prices generally, there is a case to be made for a sustainable expansion
cycle. On the other hand, moribund housing and mortgage Credit, along with
vulnerabilities in municipal finance, point to ongoing system Credit stagnation.
Total bank Credit contracted during the quarter, and most likely total mortgage
debt posted little or no growth. And in the midst of booming debt issuance,
it is worth nothing that, at $46.4bn, first quarter muni debt sales were only
about half the year ago level and the lowest amount since Q1 2000 (Thomson
Reuters).

It's been my view that the power of QE2 was not so much with the $600bn. It
was, instead, that the Fed was right there guaranteeing more than ample marketplace
liquidity at the first sign of market tumult. It was the markets' perception
of "Systemic Too Big to Fail" - confirmed, just as the markets expected. And
why not speculate on risk assets, assured that central bankers would be quick
to bolster the markets at the first sign of trouble? Especially knowing that
Fed interventions would both add liquidity and pressure the dollar - bolstering
a powerful Monetary Process now deeply entrenched in traders' psyche. Why not
just ignore risk and speculate, emboldened by the reality that systemic fragilities
ensure a potent punchbowl filled to the brim. QE2 was one more in an ongoing
series of mistakes by our central bank.

As we begin the second quarter, it's increasingly difficult for the Fed to
ignore mounting inflationary pressures. Commenting on tame "core" CPI is not
going to resonate. Yet, as a committee, they surely will disregard inflation
and cling closely (as Mr. Dudley did this morning) to their "full employment" mandate.

Still, some Federal Reserve Presidents and governors are growing uncomfortable
with a prolonged loose policy stance. There will be louder talk of the inevitability
of rate increases - and some will push for the unwind of QE2. I doubt the market
will be all that intimidated by the prospect of a few little Greenspan-style "baby-steps" commencing
sometime near year-end. It will, however, be a different story if this idea
of the Fed liquidating QE2 holdings gains momentum. Especially after the QE2-induced
inflation of global risk assets - and with massive Treasury issuance as far
as the eye can see - the marketplace will become only more sensitive to liquidity
issues going forward. QE2 makes it quite difficult for the Fed to now reverse
course.

I'll assume the Fed will attempt to pull back on liquidity operations, while
at the same time working to ensure the marketplace that its liquidity backstop
support remains very much in place. And we'll soon have the vantage point of
press briefings in which to view this juggling act. From reading and listening
to comments from some prominent ("hawkish") members of the Fed, it seems that
they are clearly more focused on inflation risk and much less wedded to a liquidity
backstop function than Team Bernanke/Dudley. Today was the first day of what
will be an intriguing quarter for our central bank.